Relative to a reference point, losses often receive more weight than equivalent gains.
Kahneman and Tversky's 1979 prospect theory. Classic parameterisations often yielded coefficients near two, but no universal ratio is established, and both the size and the generality of loss aversion are contested.
In practice
- A customer who would not pay £4 for a delivery upgrade will pay £4 to avoid losing free delivery they already had.
- A team surrenders a benefit far more reluctantly than it fought to obtain it, and the same amount is at stake.
- Possible explanations
- One explanation is prospect theory's value function, which is steeper below the reference point. Another is attention, since a potential loss is processed more thoroughly. A third is that the effect depends on how the question is posed rather than on any fixed asymmetry.
- In its favour
- The direction is among the most replicated findings in decision research, and it accounts for behaviour that expected-utility models cannot, including the reluctance to take small favourable gambles.
- Against it
- No universal ratio is established, the often-quoted figure of two to one is not a constant, and later work finds the effect shrinking or vanishing for small stakes and for people used to the domain.
- Standing
- The direction is better supported than the magnitude; no universal 2:1 ratio is established, and the effect is strongly context-dependent.
- Further reading
- Wikipedia
- Subject
- Psychology & Behavior
- Essay
- A century and a half of measuring the mind